Independent Contractor Compliance Blog - by Collabrus™

For years the IRS has been telling law makers they could collect more money if they had more resources and stronger enforcement tools to close the Tax Gap. In the past when the IRS spoke of the Tax Gap it primarily meant domestic taxpayers-those who lived and worked inside the USA. This year the IRS is reporting the existence of an International Tax Gap.

Both Tax Gaps are defined by the IRS as the sum of non-compliance with the tax law.

The IRS defines the Domestic Tax Gap as the amount domestic taxpayers should pay versus the amount that is paid voluntarily and on time. (I’ve discussed the Domestic Tax Gap in previous articles).

The IRS defines the International Tax Gap as the difference between the amount of tax that international taxpayers should pay and the amount that is paid voluntarily and on time.

Even though the IRS doesn’t clearly identify the specific segments, or industries it is considering, I believe primarily they are addressing all foreign and domestically held companies that do business both in the USA and in other countries. The IRS is looking at companies that transfer and move services, products and assets around the world-in any combination or direction. They are concerned where the services are provided, where the products are made and where they are sold.  Where do the employees, or independent contractors, perform services for these companies? Where are the sales made from? Are the costs of production and business expenses claimed in more than one country, or tax jurisdiction (i.e. are the same expenses claimed twice)? Mostly, they are concerned where international companies claim the profit that was made and to what country they pay taxes on that profit. Some countries have better tax rates and loop-holes for international companies than the USA, especially in certain industries, so if the company can do business here and claim income there it’s an advantage.

What does this mean?

In my experience when any government agency is publically talking about an issue, they have already been studying it quietly for some time. By the time they make a public announcement they are only telling us the “study” will be less “quiet” from this time forward.

Applying that to the IRS means they already know they aren’t getting their share of the gold from international companies. They probably based that theory on tax audits already completed. So from this point on, companies that do business internationally will be subjected to a greater degree of scrutiny and the higher possibility of a tax audit.

The announcement about the International Tax Gap was simply fair warning to international businesses and a request that Congress give them more money to fund more tax enforcement.